Going Private, Getting Ready
The bullet behind the Insight deal
By John M. Higgins -- Broadcasting & Cable, 3/13/2005 7:00:00 PM
Insight Communications' decision last week to go private will end the frustration that comes with being a public company buffeted by Wall Street's short-term demands. But the company's move won't do anything to head off a deal drama lurking in the wings: a confrontation that will pit Insight's Michael Willner, one of the few entrepreneurs who remain significant industry players, against the biggest cable operator in the world, Comcast's Brian Roberts.
And Roberts has a key bit of leverage over Insight that industry executives expect him to exploit: the threat of leaving Insight a company too small to thrive.
Willner and Insight Chairman Sid Knafel surprised the market March 7 by teaming up with giant buyout firm Carlyle Group. They proposed to acquire the 86% of the New York-based company owned by public shareholders for $10.70 per share, or $650 million. Investors expect Carlyle to increase its bid and sent Insight's stock $1 above that offer price.
Carlyle has been hovering around the cable industry for years but hasn't used the $47 billion it manages for significant U.S. investment in the industry since 1997. The firm was former FCC Chairman Bill Kennard's first stop after exiting the commission, joining a legion of former government officials tapped by Carlyle over the years, mostly to ease their investments in the defense sector.
Carlyle was one of several firms that approached Insight over the past year as the company's stock price dropped as much as 70%, partly because of the downdraft hurting all cable operators and partly due to Insight's substantial operating problems, which have hammered cash-flow growth. When the family behind Cox Communications decided to take that cable company private last fall, the move only sharpened financial players' interest in Insight, which seemed ripe for a similar step.
Where does Comcast fit in? Insight is a top-10 cable operator only because of a partnership with the No. 1 cable operator. The cable giant doesn't own Insight's stock but owns 50% of Insight's systems, a portfolio of 1.3 million subscribers worth perhaps $5 billion.
How did Comcast come to own that piece of the action? Insight was embedded in Tele- Communications Inc. (TCI) when that company was bought by AT&T Broadband, which was in turn acquired by Comcast. The Insight-Comcast partnership has a trigger set for later this year that could break it up.
By taking Insight private, Carlyle is betting the Comcast showdown will end more favorably than shareholders believe. The negotiations might run amicably, of course. Willner, after all, is well-liked by industry leaders, as demonstrated by his two recent terms as chairman of the National Cable Telecommunications Association and his skill in getting cable's often-clashing giants onto the same page.
But friendly haggling would be uncharacteristic for Comcast. Typically, when Brian Roberts has an advantage in a negotiation, he grabs it and hits the other side hard. Ask John Malone about the time Roberts tried to snatch control of TCI away from him. Or talk to any shell-shocked cable network from which Comcast has been trying to extract price cuts and video-on- demand programming lately.
Insight is a bit of an oddity, an artifact of the cable industry's infamous “summer of love” when Leo Hindery, then-president of TCI, remade much of the cable business by putting about a third of the cable giant's systems into the hands of smaller companies.
Mike Willner was one of the entrepreneurs who benefited. He had risen through the ranks of Vision Cable, a small operator based in northern New Jersey. Willner started off running Vision's Bergen County system, and in 1979 (at age 26) he became chief operating officer.
In 1985, a few years after co-founder and Chairman Knafel sold to Advance Newhouse, he and Willner teamed up to create Insight. Knafel controls the company's shareholder votes, but Willner runs the company.
Today, Insight is surprisingly well-clustered in midsize markets, including Rockford, Ill., Lexington and Louisville, Ky., Columbus, Ohio, and suburban Indianapolis. After a tough 18-month period in which cash-flow growth stalled, subscribers jumped to satellite television and COO Kim Kelly got squeezed out, the company is finally rebounding. Fourth-quarter revenue increased a healthy 11%, and average revenue per customer jumped 12% to $68. But cash flow has been slow to keep pace, growing just 6%. Any further progress hinges on a successful resolution of the Comcast negotiations.
The worst-case scenario for Insight: Comcast decides to break up the partnership, take its half of the business and go home, leaving Insight with just 650,000 subscribers. In a world where anything less than 5 million subscribers is considered small, that would make Insight tiny.
But the bleeding wouldn't stop there. Insight buys programming through Comcast at the same substantial discounts networks accord to the largest cable operator, 10% to 20% less than smaller operators pay. Since programming accounts for 43% of Insight's expenses, separating from Comcast could leave Insight both dramatically reduced in size and less profitable.
There's another, more likely outcome: Comcast bids for all of Insight. That could be an excellent result for Insight or an underwhelming one, depending on the price.
I'd bet on the latter, because the threat of Plan A will give Brian Roberts plenty of leverage in Plan B to squeeze the numbers.
And then there's a third way (my personal favorite) for all of this to turn out: Insight becomes a chip in the negotiations between Comcast and Time Warner. Comcast owns 20% of Time Warner Cable but is under FCC order to exit. One of the reasons Comcast and Time Warner are jointly bidding for Adelphia is to grease the unwinding of Comcast's stake.
Insight's Ohio systems are a particularly nice fit with Time Warner's existing operations, so it could become part of a bigger trade if Comcast wants to go that route.
Maybe everyone will walk away happy from the impending Insight-Comcast face-off. But it's a reminder to all executives entering into partnerships: Breakups can be painful.
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